The Supply of Cyber Risk Insurance

Martin Eling, Anastasia Kartasheva and Dingchen Ning
Additional contact information
Dingchen Ning: University of St. Gallen

No 23-118, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Cyber risk economic losses are large and growing, yet the insurance market for cyber risk is tiny, amounting to 0.4% ($2.8 billion) of premiums in the US property casualty insurance market in 2020. In this paper, we analyze the constraints that the insurance industry faces in providing larger capacity. We argue that cyber risk is special in that it combines (i) heavy-tailedness, (ii) uncertain loss distribution, and (iii) asymmetric information in underwriting. The combination of factors (i)-(iii) creates a tension between a need to raise substantial amounts of capital to finance heavy-tailed and uncertain risks and an expensive compensation demanded by investors due to information frictions. To circumvent asymmetric information costs, insurers can use internal capital. Hence, suppliers of cyber insurance are large insurance groups with a deep internal capital market. However, their capacity is constrained by the group’s size. We document stylized facts about the US cyber risk insurance market. We then establish the causal inference that insurers primarily rely on the internal capital market to supply cyber risk insurance using an exogenous shock of the non-US affiliated reinsurance tax treatment in 2017. Finally, we test which of the three features (i)–(iii) of cyber risk contribute to the cost of external capital and confirm that all of them play a significant role.

Keywords: cyber risk insurance; large risks financing; internal capital market; reinsurance; information frictions (search for similar items in EconPapers)
JEL-codes: G22 G32 L11 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2023-12
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4497405 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp23118

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().